This experiment tested predictions from social identity development theory (SIDT, Nesdale, 1999), that children's tendency to show out-group prejudice depends on the strength of their in-group identification and/or their perception of threat from the out-group. Anglo-Australian children (N = 480) aged 6, 7, or 9 years were assigned to a high-status team and their identification with the in-group (high vs. low) was manipulated together with threat from the out-group (present vs. absent). The members of the out-group were revealed to be of the same (Anglo-Australian) or different (Pacific Islander) ethnicity to the in-group. Results supported the SIDT predictions. In addition, consistent with socio-cognitive theory (ST, Aboud, 1988), dislike for the out-group at 6 years gave way to increasingly neutral reactions by 9 years of age. Ethnic composition of the out-group did not impact differentially on liking but it did affect the children's desire to change groups. Strongly identified children were reluctant to leave their group regardless of the ethnicity of the out-group, whereas children with low in-group identification were more willing to change into a same-than into a different-ethnicity out-group. It is concluded that both social identity and social cognitive processes are implicated in the development of prejudice in middle childhood.